Corporate Front: Strategy, Can ABN-AMRO Bolster Its Indian Account

CORPORATE FRONT: STRATEGY
Can ABN-AMRO Bolster Its India Account?

Only if the Dutch bank is able to offer a stream of innovative products to keep its non-interest income flowing.

By Gautam Chakravorthy

R Sobti A diamond may be forever, but banking on it ad infinitum can be less of a lifelong strategy. Ask the Netherlands-based ABN-AMRO Holding NV, which placidly concentrated on trade-financing, primarily of diamonds, in the country between 1920 and 1990. Why, the bank set up only 2 branches in the interim: one in 1920, and the second 2 years later. And then suddenly, in 1990, its subsidiary in India, ABN-AMRO Bank (ABN-AMRO), woke up from hibernation: this decade, ABN-AMRO (No. 6 on The BT Best Banks '98 Scoreboard) has set up 3 more branches in the country.

To leave no doubt about its intentions, ABN-AMRO has now put forward a multi-faceted gameplan for the Indian financial market. Spanning retail banking, structured financing, transaction banking, debt underwriting and distribution, broking, and fleet-management services, ABN-AMRO's new-found aggression is driven by its parent, which has been flexing its financial muscle in emerging markets. Says Romesh Sobti, 48, CEO, ABN-AMRO: "Our intention is to offer universal banking to our consumers." BT examines ABN-AMRO Holding's India strategy.

RETAIL BANKING. It was only as late as January, 1997, that ABN-AMRO entered the competitive and fast-growing financial service segment. But having only 5 branches, it drew up a doorstep-banking strategy. Explains Sutapa Banerjee, 33, Head (Consumer Banking), ABN-AMRO: "Other banks offer home-banking only for account opening. We offer free service at the doorstep of the consumer without any additional charge." The result: from a base of 5,000-6,000 retail customers in 1997, the bank has 32,000 customers now. By 2002, ABN-AMRO hopes to grow this to 200,000 customers. The vehicles: besides setting up ATMs, it is also going to offer loan products, get into Internet banking, and issue credit cards.

ABN-AMRO's targets are highly ambitious. The upwardly mobile retail banking customer base measures between 6 million and 7 million, and is also being targeted by the foreign and savvy private sector banks. But the global experience shows that domestic players continue to dominate the retail business, with the foreign banks playing a marginal role. Agrees Aditya Puri, 47, Managing Director, HDFC Bank: "Foreign banks will have to make a decision on their future investments."

In fact, although it's a part of its global strategy, Bank of America's (BankAm's) recent decision to sell off its profitable retail business in India--as well as Taiwan and Singapore--should ring alarm bells for foreign banks in the country. Or, perhaps, bells of opportunity? ABN-AMRO's Sobti does not rule out his bank's interest in BankAm's retail business: "We would like to grow our retail business organically and through acquisition, whenever the opportunity arises."

STRUCTURED FINANCE & TRANSACTION BANKING. Set up in 1996, the structured finance department focuses on the telecom, power, and the hydrocarbon sectors. Over the last 2 years, the bank--which has grown a 16-member team--has clocked commitments of $1.10 billion (Rs 4,620 crore) from 19 projects. Says R. Suri, 35, Head (Structured Financing), ABN-AMRO: "With corporate lending on the decline, most of the income in the future will come from specialised financing and non-fund based income."

True. The transaction banking division--which offers trade, cash management, and custodial services, and correspondent banking--has been growing at between 40 and 50 per cent per annum since it was set up in June, 1996. Points out Paul Ibrahim, 38, Head (Transactional Banking), ABN-AMRO: "We contribute nearly 36 per cent to the bank's Indian balance-sheet." Thus, non-fund based income has become the fastest-growing component of ABN-AMRO's total income. In 1997-98, Other Income registered a 66 per cent growth, while Interest Income grew by 30.40 per cent. However, while expertise and resources come easily to large foreign banks, Other Income tends to be a volatile component of earnings.

DEBT UNDERWRITING. In April, 1998, ABN-AMRO Holding set up ABN-AMRO Securities (India): a 75 per cent subsidiary, with the remaining stake divided between the Dabur Group's Burman family (12.50 per cent), J.R. Desai (former chairman of Kelvinator Of India; 6.25 per cent), and Yashovardhan Birla (CEO of the Yashovardhan Birla Group; 6.25 per cent). On a capital base of $20 million, the subsidiary has obtained a primary dealers' licence. Adds Vishnu Deuskar, 45, Managing Director, ABN-AMRO Securities : "The firm became the single-largest arranger for funds in the first and second quarters of the current year. We definitely believe that it is not the beginner's luck syndrome."

ABN-AMRO Securities has arranged various deals for clients like GE Capital, Reliance Industries, TISCO, and Tata Electric Co.. The subsidiary--which plans to launch an asset management company, but only after running a debt fund--will have to continuously launch innovative products in a highly competitive marketplace. On the other hand, primary dealers have been having it good over the last couple of years. In 1997-98, they snapped up 34 per cent of the government security and 54 per cent of the Treasury Bill turnover in the secondary market. Adds V. Srinivasan, 33, Head (Fixed Income), I-Sec: "New players will add liquidity and depth to the market, although profit margins will be under pressure."

EQUITY BROKING. ABN-AMRO Equities (India), the 75:25 joint venture with Infrastructure Leasing & Financial Services, was launched in 1993 to service ABN-AMRO's foreign institutional investor clients. Claims Sobti: "The subsidiary already has a 5 per cent marketshare of the foreign institutional investor business." But with the prevalent restrictions on the operations of foreign institutional investors, ABN-AMRO has a tough task ahead. For, burdened by an inverse cost-return relationship, many large investment and equity broking houses--like NatWest Securities, Deutsche Morgan Grenfell, ing Barings, and BZW Barclays--have gone under in the country. Warns Sanjay Sharma, 35, Director, First Global Finance: "The future of foreign broking firms is bleak since their costs are high."

It is too early to gauge whether ABN-AMRO's forays into investment banking and fleet management will deliver returns. Set up 3 months ago, ABN-AMRO Asia Corporate Finance (India), plans to offer advisory and arranging facilities for M&A and privatisation, and private equity for such deals. On the other hand, fleet management, which will be brought in by a 100 per cent subsidiary christened ABN-AMRO Lease Plan, is an entirely new concept in the country. The services--which will meet the complete vehicular requirements of a company, including maintenance, insurance, tax management, and fleet replenishment--will be launched in July, 1999. The company is targeting large corporate houses looking at outsourcing this activity. Says A.S. Popley, 61, Consultant, ABN-AMRO Lease Plan: "Although the potential is high, a lot will depend on the roads and infrastructure development."

With traditional bank-lending on the decline, ABN-AMRO certainly needs to broadbase its strategy. In March, 1998, its total borrowings had registered a 112 per cent jump while deposits had grown by 30 per cent. In the same period, the bank's contingent liability had more than doubled to Rs 24,486.85 crore. That is worrying, since a large part of this liability consists of outstanding forward contracts. Thus, the only route out is to grow its Other Income. Asserts a survey of banking in emerging markets in The Economist: "The Dutch bank has plenty of financial muscle and determination, but arrived late on the scene and has a lot of catching up to do." While ABN-AMRO's intentions are sound, the question is whether its bank of innovation will prove deep enough.

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